ETF Trends
ETF Trends

Exchange traded funds (ETFs) may have siphoned billions of investment money out of mutual funds in the past year, but when it comes to high-yield bonds, mutual funds are bringing a competitive game.

In March, more than $1 billion found its way into two of the largest high-yield ETFs: the iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK), indicating investors’ growing interest in high-risk/high-yield bonds and increasing confidence in the economic recovery, comments Don Dion for TheStreet. [ETFs to Earn Income When Yields Elsewhere Are Low.]

HYG has an index with 300 holdings, an expense ratio of 0.50% and a 8.1% yield. As a result of the fund’s large holdings, the fund has a very equal weighting among its holdings, with its top 10 holdings only accounting for 10% of its portfolio. Top holdings include debt of Texas Competitive Electric (NYSE: NRG) and Sprint Nextel (NYSE: S)

JNK has an expense ratio of 0.40% and 8.3% yield. JNK’s index is more concentrated, compared with that of HYG’s. JNK’s top 10 holdings make up almost 20% of the fund’s total index. Top holdings include debt from AIG (NYSE: AIG), GMAC (NYSE: GJM) and Citigroup (NYSE: C).

Some of the benefits high-yield ETFs enjoy over similar mutual funds include:

  • Similar to the ETF offerings, mutual funds that offer access to high-yield debt also track a select basket of low-grade corporate debt. However, the mutual fund offerings take an active approach while HYG and JNK are designed as passive products.
  • Mutual funds rely on the know-how of their managers, which means higher expense ratios. Mutual fund expense ratios can exceed 1.0% and can incur short-term fees for shares held less than 90 days.
  • The higher fees also mean that the mutual funds pay out lower yields.
  • Mutual funds lack intraday liquidity, transparency and frequently have hefty investment minimums, as well.

When it comes down to total returns, leading high-yield mutual funds have recorded total returns of up to 20% in the past two years, whereas JNK and HYG have provided 12.8% and 11.1%, respectively. Still, HYG and JNK are better for short-term trades because of their transparency, ability to trade throughout the day and lack of short-term trading fees. Mutual funds may be the better choice for long-term investing due to their total return outperformance.

For more information on high-yield bonds, visit our high-yield bonds category.

For full disclosure, Tom Lydon’s clients own shares of JNK.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.